Back to Investment overviewProfile
| Sector | Defence |
| Gross Value Added (2023) | £10-12 billion |
| Number of workforce jobs (2023) | 164,000 direct jobs in the defence industry |
| Business investment (2022) | £842 million R&D spend |
| Key projects | Dreadnought-class submarines, Global Combat Aircraft Programme (Tempest), Type 26/31 Frigates, Lightning II (F-35), Skynet 6 |
| Key UKRN regulators | Single Source Regulations Office (SSRO), MOD (for competitive procurement) |
| Regulatory approach | SSRO regulates non-competitive (single-source) defence contracts; competitive defence contracts are awarded by the MOD in accordance with public procurement legislation. The overall framework is designed to promote value for money, transparency and appropriate returns for suppliers. |
The UK defence sector is a strategically significant part of the national economy and security framework. It provides essential military capability to the British Armed Forces and underpins the UK’s ability to meet NATO commitments and respond to global security challenges. The sector is characterised by a small number of large prime contractors, a network of mid-tier suppliers, and hundreds of highly specialised small and medium-sized enterprises (SMEs) and micro businesses. This structure combines scale with innovation, enabling delivery of complex programmes such as nuclear submarines, advanced combat aircraft, and integrated weapons systems.
- Economic footprint and employment. The defence industry contributes an estimated £10–12 billion in Gross Value Added (GVA) annually1 – around 0.5% of UK GDP – and directly employs approximately 164,000 people2 in high-skilled roles, including engineering, manufacturing, and systems integration. Productivity and wages in defence are well above the national average, reflecting the sector’s advanced technological base. Including indirect employment through supply chains, the total jobs supported exceed 250,000.
- Regional distribution. Defence activity is concentrated in key industrial clusters. The South West hosts major naval facilities and aerospace hubs. Other significant centres include Barrow-in-Furness (submarine construction), Lancashire (combat air), and Glasgow (warship building). These clusters anchor regional economies and sustain long-term employment.
- Supply chain and SMEs. SMEs play a critical role in innovation and niche capability, supplying advanced materials, precision engineering, and cyber solutions. Government initiatives under the Defence Industrial Strategy aim to increase SME participation through simplified procurement pathways and dedicated support offices.
- Investment and innovation. Defence is capital-intensive and research-driven. Based on the latest published industry survey data, in 2022 UK defence companies invested £842 million in R&D, with industry-funded R&D rising to £171 million3. Government-funded defence R&D remained dominant at that point and has since increased, reflecting the strategic nature of defence technology. Innovation priorities include autonomy, artificial intelligence, uncrewed and counter‑uncrewed systems, advanced propulsion, and space systems.
- Global trade. The UK is a leading defence exporter. Export orders reached £13.2 billion in 2024, reflecting continued strength in international sales, including European land programmes and naval deals. Around one-third of industry turnover comes from overseas customers, providing revenue diversification beyond the domestic MOD budget.
The Government has committed to raising defence spending to 2.5% of GDP from April 2027 and has stated an ambition to increase spending to 3% of GDP in the next Parliament. The Strategic Defence Review and the Defence Industrial Strategy together set out the Government’s direction of travel for defence, signalling a focus on readiness, resilience, sovereign capability and long‑term industrial capacity. Long-term programmes such as Dreadnought-class submarines, Global Combat Aircraft Programme (Tempest), and Type 26 frigates provide multi-decade revenue visibility for prime contractors and their supply chains.
1 These figures reflect research and development funded by defence companies themselves (including shareholder and retained earnings) and are separate from MOD‑funded defence R&D spend, a proportion of which is incurred overseas.
2 This figure reflects the GVA of the defence industrial base and does not capture the wider economic impact of defence spending across the public sector, supply chains, induced employment or multiplier effects, which are substantially larger.
3 This figure relates to employment in defence manufacturing and support industries and does not include serving military personnel, Defence civil servants or reserves, which together employ a substantially larger workforce.
Within defence, multiple UK regulators exercise statutory responsibilities where MOD activity intersects with their remits. In addition to the SSRO’s role in overseeing qualifying non‑competitive defence contracts, other UKRN members regulate specific aspects of defence activity, including aviation, communications and data protection. The regulatory model for defence is distinct from other infrastructure sectors:
- Competitive contracts: Governed by the Public Procurement Act and Defence and Security Public Contracts Regulations. The MOD acts as the contracting authority, applying public procurement legislation, with assurance, compliance and security‑related oversight provided by the National Infrastructure and Service Transformation Authority (NISTA) and, where relevant, competition authorities.
- Single-source (non-competitive) contracts: Overseen by the SSRO under the Defence Reform Act 2014. The framework applies to qualifying defence contracts above £5 million awarded without competition, placing controls on allowable costs and profit markup, and requiring reporting and transparency. The SSRO recommends an annual Baseline Profit Rate, which is the starting point for determining contract profit. For 2026/27 this is set at 9.10%. The rate is then adjusted to reflect contract‑specific risk factors, providing an illustrative range of between 7 per cent to 14 per cent, which is comparable to profit rates in the sector. Where contractors take on risk and perform well through the life of the contract, they can achieve considerably higher profit rates whilst those who fail to perform can earn less. Unlike most other regulated sectors which take a cost of capital approach, profit in single source defence contract is regulated through markups on individual contracts whilst ensuring a fair and reasonable return on capital.
The regulatory focus is on value for money, transparency, and ensuring suppliers receive a fair and reasonable price.
The SSRO is the UK’s economic regulator for qualifying non-competitive defence contracts. Its statutory functions include:
- Recommending the Baseline Profit Rate (the first-step in the process for agreeing the contract profit rate) for single-source contracts.
- Issuing guidance on allowable costs.
- Collecting and analysing contract and supplier data.
- Providing opinions and determinations to resolve disputes.
- Publishing annual statistics and benchmarking data.
- Advising on improvements to the regulatory framework.
The SSRO operates independently of the MOD, aiming to balance taxpayer value with supplier fairness. Its approach is evidence-based and transparent, with regular engagement with industry and government.
How the SSRO supports investor confidence
The SSRO supports investor confidence primarily by providing certainty, clarity and timely resolution within the regulatory framework for qualifying single source defence contracts.
More broadly, the single‑source regime establishes a clear, well‑understood and rules‑based framework for pricing and managing non‑competitive defence contracts, with defined statutory guardrails that support long‑term investment. The annual Baseline Profit Rate and published SSRO guidance provide transparency and predictability around returns, while the SSRO’s statutory independence from the MOD reinforces confidence that the framework is applied impartially and consistently.
The SSRO maintains regular engagement with industry, including prime contractors, mid‑tier suppliers, SMEs and representative bodies, through consultations, workshops, guidance development and routine bilateral engagement. This provides channels through which companies and investors can understand how the regulatory framework operates in practice and how it is evolving. The SSRO also helps to provide certainty by offering advice on the application or interpretation of the regulatory framework, through our Non‑Referral Advice Service (NRAS).
NRAS allows parties to seek advice on the regulatory framework before contracts are entered into. This helps reduce uncertainty about allowable costs, contract pricing and profit adjustments, enabling suppliers and their investors to take informed decisions at an early stage.
By clarifying regulatory expectations upfront, NRAS can reduce the likelihood of disputes arising during contract delivery, lowering regulatory risk over the life of major programmes that often involve significant capital investment and long timescales. Importantly, NRAS operates without disclosing commercially sensitive information and without favouring either party, maintaining confidence in the impartiality of the regulatory regime.
In addition, the SSRO can formally settle disputes and resolve contract-specific issues between the MOD and industry through its opinions and legally binding determinations. This statutory function reduces the risk of prolonged uncertainty, helps prevent delays to procurement or programme execution, and supports the continued flow of investment into defence capabilities by providing clarity on regulatory outcomes. Taken together, these functions support a more predictable and transparent regulatory environment. While the SSRO does not promote or approve individual investments, its role in reducing regulatory uncertainty and resolving issues efficiently is an important component of investor confidence in the UK defence sector.
The SSRO is open to direct engagement with analysts and investors, including consultations and a helpdesk for regulatory queries.
The SSRO and MOD provide a range of information relevant to analysts and investors:
- The SSRO publishes annual statistics on the single-source regime, including contract values, profit rates and compliance data.
- The Defence Industrial Strategy (2025) commits the MOD to developing and publishing a Defence Investment Plan and a five‑year procurement pipeline, intended to improve transparency and predictability for suppliers and investors. The DIP will set out a long-term view of planned spending and capability priorities. This is intended to provide greater predictability for industry, lenders and investors making long-term capital allocation decisions.
- The MOD has also established a number of dedicated offices and functions to support structured engagement with suppliers and investors. These include the Defence Office for Small Business Growth, which acts as a single front door for small and medium‑sized enterprises and provides support on access to defence opportunities, contracting and growth pathways. There is also the Defence Industrial Joint Council (DIJC), which is a senior‑level forum for strategic engagement with industry, including primes, SMEs, investors and trade associations.
- Within the MOD, Defence operates a range of commercial, finance and industry engagement teams, and the National Armaments Directorate provides multiple points of contact for industry and investors across its capability areas and portfolio responsibilities. More information about these various channels is available on the MOD website, including information about MOD procurement processes, supply chain opportunities and government grants and funding.
- The MOD also publishes the “Defence in Numbers” report and equipment plan summaries, offering macro-level context on spending, regional impact, and future procurement plans.